It might be argued that the subject of last month’s book review, Africa’s Odious Debt, neatly complements Nicholas Shaxson’s new book, Treasure Islands. While last month’s book choice was invaluable as it quantified the extent of Africa’s capital flight, this book lays bare the financial mechanisms that allow that capital to flee.
Lord Nicholas Stern, the former World Bank chief economist, says Treasure Islands does “an outstanding and socially valuable job in penetrating the impenetrable [finding] a deeply shocking world”.
Treasure Islands is, essentially, about tax havens. However, it may surprise readers to learn that – as well as those tropical island paradises and other enclaves that are associated with impenetrable banking and corporate secrecy – mature financial markets are also heavily involved. Whether it is the City of London, the UK’s financial centre and historically the biggest offshore player that has long been a key player in the offshore game, the ultra secretive Swiss banking industry, or Wall Street in the US, there is tough competition amongst global jurisdictions to attract the ‘hot’ money that swirls around the world searching for an amenable, hidden from scrutiny, tax-free home. The extraordinary fact is that while ‘hot’ money is often (though not always) misappropriated and/or the proceeds of straightforward criminal enterprise, the system that hides it from view is absolutely legal. It may be utterly reprehensible and unethical, but the offshore industry breaks no laws.
Rather, it relies on a system that has evolved over many decades in a piecemeal fashion to serve the powerful and the wealthy – often at the expense of the world’s weakest and the poorest citizens. As Shaxson comments: “… OECD member states, notably Britain, the US and several big European havens, are guardians of the offshore system. It continues to process vast tides of illicit money.”
Part of this flow of money is driven by the desire of multinational corporations to minimise their tax bill. They do this, quite legally, by moving profit from high taxation territories to low or no taxation territories. This is where tax havens come into their own. Typically, many Africa countries suffer from this avoidance strategy.
But there remains the problem that if a company returns its profits to its home jurisdiction, it will be taxed there. So the company sends the earnings to a third country, and the money then passes along a carefully constructed tax-free corridor to the wider world, depriving both Tanzania and Germany tax revenues.
Shaxson quotes Professor Sol Picciotto, a tax haven expert, who explains: “It’s like two closely marked football players passing the ball to a third one who is unmarked … [a conduit tax haven] can create major gaps in the defences of tax authorities.”
Later the author makes the point that “secrecy jurisdictions routinely convert what is technically legal, but abusive, into what is seen legitimate [author’s italics]. But of course what is legal is not necessarily what is right: slavery and apartheid were both legal in their day.”
Deep drains of development
Shaxson says that the offshore industry represents “deep drains of development” and also argues that the world’s largest corporations could never have grown so vast and powerful without tax havens. “Goldman Sachs is very, very much a creature of offshore,” he avers. “And every significant financial catastrophe in the world since the 1970s, including the latest global economic crisis, is very much an offshore story … offshore has bent the world’s economy into its present shape, transforming societies and political systems in its image.”
But don’t just take Shaxson’s word for it. Raymond Baker, the director of Global Financial Integrity (GFI), describes the offshore system as “the ugliest chapter in global economic affairs since slavery”. Although Shaxson says Baker is absolutely right in this regard, he takes issue with the GFI’s figures regarding Africa’s total illicit outflows – for example describing the Angola figures of $4.68bn (of the $51bn in oil and diamond exports between 1993 and 2002) as simply having to be “a gross underestimate of the looting”.
He makes this statement based on his own personal investigations of Angola’s economy and leadership, the many years he spent as the Reuter’s correspondent in the country and his research of other oil-rich economies in the continent (much of which he published in his previous book Poisoned Wells – The Dirty Politics of African Oil).
This knowledge allows him to use the Gaydamak affair, when the Russian-born Arkady Gaydamak allegedly created an $800m oil-for-arms deal for Angola that skirted international sanctions and made extensive use of the secrecy of tax havens. But, as Shaxson comments ruefully, “I could have chosen any number of murky offshore episodes to explore: Gaymadak’s deals are only a tiny fraction of what the offshore system has drained from Africa.”
Elsewhere the author writes: “It was Africa’s curse that its countries gained independence at precisely the same time as purpose-built warehouses for loot properly started to emerge.”
Clearly, corrupt African elites could never have misappropriated the billions of dollars they have without the conduit tax havens that offer secrecy and myriad professional services such as off-the-shelf companies, dummy trusts, nominees, lawyers, accountants, name-plate offices and no real regulatory oversight.
But the Tax Justice Network’s Financial Secrecy Index lists, along with the usual suspects, the world’s most important secrecy jurisdiction – “by a mile”, in Shaxson’s own estimation – as being the US. Every tax haven has its specialist attractions, and the US state of Delaware’s would appear to be in granting corporate bosses “extraordinary freedom from bothersome stakeholders, judicial review and even public opinion”.
Just to give a flavour of what Delaware offers can be gleaned from a retort that was made to a criticism by US President Barack Obama. Obama suggested that Ugland House in the Cayman Islands, that houses over 12,000 corporations, was either the biggest building, or the biggest tax scam, on record.
The chairman of the Cayman Islands’ Financial Services Authority, Anthony Travers, shot back that Obama would be well advised to focus his attention on Delaware.
“An office at 1209 North Orange Street, Wilmington, Delaware houses the grand total of 217,000 companies,” Travers remarked. Shaxson explains that this address, “a yellowish brick low-rise,” is the office of the Corporation Trust, and legally speaking, “the home of Ford, General Motors, Coca-Cola, Kentucky Fried Chicken, Intel Corp., Google Inc, Hewlett Packard, Texas Instruments and many more corporate giants … but they are not here for secrecy but for corporate governance.
“The Corporation Trust will, as part of their services, also help your company serve and receive notices, subpoenas, summonses and suchlike.” It is thought that over half of the US’s publicly traded companies and nearly two thirds of the Fortune 500 are incorporated in Delaware where there is a laissez faire attitude to corporate governance and where shareholders and stakeholders have few rights. It breeds unaccountability.
When Shaxson tried to investigate further by visiting the 1209 North Orange Street address, he was refused a previously agreed interview and denied entry beyond the reception.
But what he saw, in the long rows of work cubicles, was similar to what he had observed at Ugland House, thousands of miles away in the Cayman Islands.
In the final, concluding chapter, Shaxson provides 10 pointers that might reform the world’s financial system and counter the offshore scandal. The points overlap, but in summary they are: that we must pursue transparency; prioritise the needs of developing countries; confront and dismantle the UK’s historic spider web of tax havens; reform onshore tax; demand leadership and unilateral action in this effort; tackle the offshore intermediaries; accept the financial sector needs reform; insist on corporate responsibility; and, finally, promote a change in the culture that fawns on those that get rich from abusing the system.
“It is time for the debate on tax havens to begin in earnest,” Shaxson writes. “If we do not act together to contain and control financial secrecy, then the world I found in West Africa, a world of suave insiders, impunity, international criminal complicity and desperate poverty will become the world we leave to our children.”